Greetings. Welcome to SharkNinja's Second Quarter 2023 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. At this time, I'll turn the conference over to Arvind Bhatia with Investor Relations. Mr. Bhatia, you may now begin.

Hello, everyone. Good morning, and welcome to SharkNinja's Second Quarter 2023 Earnings Conference Call. Joining me on today's call are Mark Barrocas, SharkNinja's Chief Executive Officer; and Larry Flynn, Interim Chief Financial Officer and Chief Accounting Officer. Mark will begin by providing an overview of SharkNinja's business model and the key reasons we believe we are well positioned for long-term growth. Larry will then review our financial results and discuss our 2023 outlook. After that, we will open the call for your questions. By now, everyone should have access to the earnings release for the period ended June 30, 2023, issued this morning. The press release is accessible on the company's website at ir.sharkninja.com. And shortly after the conclusion of today's call, a webcast will be archived and available for replay. Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties. If you refer to SharkNinja's earnings release as well as the company's most recent SEC filings, you will see a discussion of factors that could cause the company's actual results to differ materially as a result of these forward-looking statements. Please remember the company undertakes no obligation to update or revise these forward-looking statements in the future. During the call, we will make a number of references to non-GAAP financial measures. We believe that these measures provide investors with useful perspective on the underlying growth trends of the business and have included in our earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures. Now I will turn the call over to Mark.

Thanks, Arvind. Good morning, everyone, and thank you for joining us on SharkNinja's first earnings call as a public company following our successful listing on the New York Stock Exchange last month. I am thrilled to have the opportunity to discuss with you our powerful business model, strong second quarter results and positive outlook. Let me start by telling you a bit about SharkNinja we create innovative products that solve consumer problems. We have built a repeatable consumer problem-solving engine with a mission to positively impact people's lives every day in every home in the markets that we serve. We are not an overnight success. I have been leading SharkNinja's day-to-day business since 2008 and have been surrounded by an incredible team that has driven the company's transformation from an early-stage pioneer in small household appliances to a leading global product design company. We have net sales from less than $250 million in 2008 to over $3.7 billion in 2022, a compound annual growth rate of 20% over the last 15 years. We have delivered growth in 14 out of these 15 years, and this growth has been organic. We have not bought a dollar of growth over that period. Our $2 billion brands, Shark and Ninja have each disrupted the categories in which they operate. Our brands are deeply trusted by consumers, and our business is highly diversified, which has allowed us to drive sustainable long-term global growth. We are diversified across brands, products, product categories, distribution channels and geographies, and we are not dependent on any one retailer or a supplier. We are currently in 28 product subcategories across these 2 brands and have presence in 26 markets globally. We sell our products through more than 150 retailers from mass retail to department stores to specialty retail and…

Thank you, Mark, and good morning, everyone. I'm excited to be speaking to you at first earnings call as a public company. I'll start with a review of our strong second quarter results, followed by our positive outlook for 2023. During the second quarter, net sales increased 22% year-over-year to $950 million. Adjusted net sales, which excludes sales from our former Japanese subsidiary and APAC distribution channels, increased 20% to $906 million. Our sales growth was driven by strength in Europe, particularly in the U.K. as well as the success of our recent product launches in the outdoor cooking and beauty categories, notably the Outdoor Grill and the Shark FlexStyle. Looking at the first half of this year, we delivered net sales growth of 14% and adjusted net sales growth of 13%. To help analyze our business, we break down our sales into 4 categories. And as Mark mentioned, we grew sales in all 4 categories during the second quarter. First is cleaning, which includes vacuums as well as other floor care products such as steam mops and wet and dry cleaning floor products. For the second quarter, net sales in the cleaning category increased slightly to $414 million, representing 44% of net sales compared to $411 million or 53% of net sales in the prior year. Growth in the multi-floor care subcategory was partially offset by softness in the North America market, specifically in corded vacuums as consumers shifted towards cordless. The second category is cooking and beverage, which includes appliances such as air fryers, multi-cookers, outdoor and countertop grills and ovens and carbonation. Net sales in this category increased a strong 68% to $343 million, representing 36% of net sales compared to $204 million or 26% of net sales in the prior year. Growth here was primarily driven…

Thanks, Larry. In conclusion, we are off to a great start in 2023. We delivered a very strong second quarter and first half, and believe we have significant momentum. Over the long term, we strive to enter new markets and reach every living room, bedroom, kitchen and backyard as we drive growth and profitability. We believe our commitment to innovation and international expansion and our compelling financial profile sets us apart from our peers. We are confident that we are on the right path towards fulfilling our mission while simultaneously creating significant value for all our shareholders. That concludes our prepared remarks, and I will now turn it over to the operator to kick off Q&A. Operator?

[Operator Instructions] And our first question today comes from the line of Phillip Blee with William Blair.

Congrats on your first quarter. Can you just provide a bit more color on your marketing expense this quarter. It's up quite a bit year-over-year. Can you just speak how much of that growth is attributable to the ramp of new products and then maybe the split between U.S. and international markets?

Yes. Sure, Phillip. I'll start and Larry can chime in here. So we have grown marketing expense, and it's really attributable to a few things. One is -- this was the first full year that we were in outdoor cooking. The seasonality of that business is very heavily in the second quarter. We were not in that category back in 2022. So there was a chunk of advertising that was invested in the outdoor cooking space. We expanded marketing expense quite a bit in Europe and the U.K. Again, we're continuing to aggressively ramp our European business. We're launching lots of new product categories in the U.K. And so, it's really a combination of kind of those 3 things. I mean outdoor cooking in the U.S., expansion in Europe and lots of new categories in the U.K.

Okay. Great. And then just as a quick follow-up. I mean, can you maybe speak then how we should think about growth in this line going forward as you continue to invest in product innovation as well as any seasonality around potential new products and then international growth?

Yes. So Phillip, I mean, we had 80% growth this quarter in our international segment. And so we're very excited about the momentum that the international business is having. I mean both deeper penetration in new markets like Germany and France as well as just expanding into more product categories in those markets as well. You'll notice that over the course of the last few weeks, we just launched into 2 new major new product categories with our expansion into the Ninja Thirsti product, which is an at-home beverage maker. It's the first time that we're entering that segment of business. And we also launched a product called the Shark CarpetXpert which puts us into the carpet extraction and spot cleaning business. And so these are kind of 2 big definable new categories on the Ninja side as well as on the Shark side. We're launching 14 new products over the course of what has really been over the last 30 days and over the next couple of weeks in nearly every one of our major categories. And so you'll see a lot of new innovation from the business, both in keeping our existing categories exciting for the consumer, and also entering into those new categories. So I think you're going to hear the same mantra from us over and over again, which is international expansion, expanding into new big definable categories and continuing to grow share in the existing categories that we're in.

Our next question is from the line of Rupesh Parikh with Oppenheimer.

So I just want to start off with the macro question. So just curious how you characterize the consumer backdrop you're seeing in the U.S. right now and maybe some of your other key markets?

Yes. Sure, Rupesh. I mean look, we're obviously empathetic to the consumer in these uncertain inflationary times. I mean -- but we think that the combination of the innovation and performance and quality and affordable, accessible value that SharkNinja is providing, is giving a reason for the consumer to continue to purchase our products. I think at a macro level, I mean, we're starting to see retailer inventory stabilizes after a few quarters of kind of retailer inventories destocking, And so, we think that's a positive sign. We're not necessarily seeing those inventories increase, but at least we're starting to see them now stabilize. But we're -- we believe that we're giving the consumer a reason to invest and spend. And in these uncertain times, I think consumers are kind of looking for value and they're looking for something exciting. And SharkNinja, I think, is delivering that.

Great. And then maybe just one follow-up question. So really strong gross margin performance this quarter. As you look out for the balance of the year curious on the puts and takes on the gross margin line and then how you're thinking about the promotional backdrop for the balance of the year as well?

Yes. I mean, look, I think we're seeing normalization of our freight rates versus prior year, we're seeing a normalization of our commodity prices. And so those are obviously providing some kind of tailwind benefit for us on a year-on-year basis. I mean, we've talked about the fact that 2022 was a very challenging year on the cost side. So I think from a margin standpoint, we believe that kind of the full impact of some of those tailwinds will not really hit us until kind of the end of Q3 and potentially even into the beginning of Q4. But Larry, maybe there's some that you should also...

Yes. I think so right, we saw through the first half of '23, right, from a gross margin perspective, expansion of 330 basis points. So I guess, we look at the back half of the year kind of with what Mark talked about, we kind of see that, I guess, that expansion year-over-year kind of expanding at a faster rate in the second half relative to the first half.

The next question is from the line of Steven Forbes with Guggenheim Securities.

This is Anders Myhre on for Steven Forbes. I want to start it off with market share. Within your Investor Day presentation, you have a slide showing share gains from 2019 to 2022. And I just clear that your business was a beneficiary of the COVID period. So maybe a 2-part question here. One, can you walk us through the key factors that allowed for such tremendous categorical share gains during that period? And two, how does the team internally think of the medium and longer-term share capture opportunities?

Yes. I mean, look, I think how we think about market share is identifying what we think is the white space in the market and creating innovative products that solve unmet consumer needs in those categories. And so we've been able to demonstrate that, as you pointed out, across a number of the subcategories that we're in. But it really comes from this combination of innovation and performance, high-quality, reliable products at affordable accessible prices, supported by a very significant investment in media and creating consumer demand for our products. And then a dominant omnichannel strategy where our products are distributed across nearly every brick-and-mortar outlet were some of the most search brands on Amazon and other dot-coms and a robust direct-to-consumer business. So I mean I think it's a combination of all of those things that are driving those market share gains that you see. We don't talk about kind of market share at a quarterly level. We'll talk to market share at our year-end, but we believe that with what we have in the marketplace right now and the new products that we're continuing to launch we're set up for a strong market share position as we move forward.

Got it. And with the consumer becoming more savvy and increasing competition, how do you position short major products to went into consideration process?

Yes. I mean, there's a lot of factors to that. Obviously, we have a strong investment in media and advertisement. Our products are some of the most watch products on social media. I mean you can look at our Ninja CREAMi product that has nearly 800 million views on TikTok, our Shark FlexStyle with over 400 million views. We're broadening the demographics of our consumers. I mean consumers are coming into our brands at a younger age than they ever have before. Our expansion into categories like outdoor cooking and robotics are bringing in a more male consumer. So I think we believe that as we expand into new categories, we're selling consumers from Shark and Ninja. Consumers are buying more than one product across brands, and it really is ultimately comes down to our ability to continue to create innovative products that solve consumer problems. I mean, it all kind of ties back, I think, to the product piece.

Our next question is from the line of Megan Alexander with Morgan Stanley.

I just wanted to follow up on your comment on retail destocking and maybe some softness in North America. Could you maybe expand on those 2 points a bit? Maybe talk about what you're seeing from a POS perspective what DTC versus wholesale looks like? And then as you're talking to retailers without replenishing, how are you thinking about ordering for the holiday season, which is obviously a very important time for many of your categories?

Sure. Sure, Megan. So look, we obviously saw significant retailer inventory destocking in the second half of last year and into the first quarter of this year. We have also seen very nice growth in our direct-to-consumer business. Our direct-to-consumer business right now is the fastest-growing portion of our overall business. In the second quarter, I think we saw a leveling off of that destocking where kind of POS was more matching inventory shipments. I think that we are cautiously optimistic that as we move into the holiday season, you'll start to see some retailers that may have lost some sales as a result of running inventory levels too low and too tight. I don't know that that's going to be a drastic kind of bounce back or rebound. I think some retailers are still quite cautious around that. But I think when the consumer is not able to find those products on a retailer shelf, they are also turning to our direct-to-consumer channel, which is helping us as well. So I think we're kind of cautiously optimistic that we'll see a little bit of tick up in inventory levels, but not planning for that to be significant.

Awesome. That's helpful. And maybe a follow-up on that. To your point, there's a lot of moving parts this year with the retail destocking, some pressure on the consumer, and you're still expecting to grow sales 10% to 12%. So how are you thinking about a more normalized top line algo for the business. This category tends to grow in the low single-digit range, you're going well above that. Is the expectation you can continue to grow the top line double digits beyond this year?

Yes. So great question, Megan. I think, obviously, we've given here our 2023 kind of outlook at this point in time. In terms of the longer-term kind of algo and how we think about even just the top line growth, not something that we're necessarily commenting on at this point in time. But we think there obviously is great opportunities, as Mark talked about, existing categories and taking share and then obviously expansion into new categories and internationally. There's obviously a lot of good pieces to the story there, but not something we're giving specific guidance on at this point in time.

Our next question is from the line of Noah Zatzkin with KeyBanc Capital Markets.

Congrats on the first quarter. Can you talk a bit about how you're thinking about the runway for cooking and beverage as well as beauty obviously, nice growth there via new launches. So just trying to understand how you're thinking about the opportunity there maybe relative to your more mature categories over time?

Yes. So Noah, I mean, I think we're excited about those categories. I mean you'll notice if you go online, that we recently just signed a partnership with Chris Appleton, very popular celebrity hairstylist, and at the same time, also launched 2 new products in our hair care space, the Shark SmoothStyle and the Shark SpeedStyle. So the goal is for us to now continue to expand the beauty category from a SKU base, you're very much in the same way that we've been able to do across all the other product categories. I mean, break into the market and then continue to keep expanding across different price points, across different feature sets. The SmoothStyle is going to be sold for $99. I think it's going to bring in a more opening price consumer into our hair care space, our SpeedStyle at $199 and our FlexStyle at $299. On the cooking and beverage space, we -- the launch of the Ninja Thirsti I think puts us into a really exciting new category that is very much consumable led. We're selling the consumer a product that allows them to make still or sparkling drinks on their countertop. But then we're selling them drink pods and CO2 canisters that they will be coming back to purchase from us. And so we're excited about what that's going to enable us to be able to do from just an ongoing relationship with the consumer as we expect them to come back multiple times over the course of the year to buy those consumable products. And then lastly, I would say in outdoor cooking, we launched our Ninja Woodfire Grill that has been a big success for us, both in the U.S. as well as in Europe. And we recently just launched last month our Ninja Woodfire Outdoor Oven. And again, further kind of penetrating an expansion into this outdoor cooking space now with not just grills, but with ovens as well. So I think you'll see a similar formula across all of those new categories that we've entered into.

Great. Maybe just one more follow-up. From a product innovation perspective, could you talk about the development process a bit as it relates to consumer preferences in different markets. So do you aim to produce product that's one size fits all for lack of a better term? Or is product differentiated by geography?

Yes. I would say, Noah, that probably 80% of the products that we're developing today are products that we're developing for a global consumer. And for the most part, those are very similar across geographies. There's probably 20% of our products that are a little bit more geographic specific or might have certain changes to the product for some sort of geographic reason. I mean, maybe more carpets in North America and the U.K. versus Latin America or Europe. But 80% of our products today are developed on a global basis.

At this time, we have reached end of our question-and-answer session. I'll turn the call over to Mark Barrocas for closing remarks.

Yes. Thank you. So we appreciate your participation on today's call. We'd like to thank you for taking the time to learn more about the SharkNinja story. It's been tremendously gratifying to grow the business. And as we take our next step as a public U.S. company, I'm excited to share the future of SharkNinja with all of you. We look forward to speaking with you again on our third quarter earnings call, and have a great day. Thanks so much.

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.